US interest rate rise looks closer

Euro

The week commenced on a positive tone for the dollar after Federal Reserve Chairman Alan Greenspan said the U.S. central bank will do what is required to keep inflation in check.

Greenspan's comments were interpreted by some as a sign the Fed could move more aggressively than first thought to raise rates, which could help entice foreign investors to dollar-denominated bonds. The Fed has held overnight interest rates at a 1958 low of 1 percent since last June.

But it is widely expected to raise them by a quarter percentage point when it meets on June 29-30. Adding to the euro's woes were more hawkish comments from other Fed officials who said the central bank was determined to defend price stability and support the U.S. economic recovery and that it would act decisively to keep prices in check.

The single currency also suffered after Italian Prime Minister Silvio Berlusconi and European Commission President Romano Prodi clashed over EU monetary policy, mirroring a growing rift over economic policy for the region.

Berlusconi criticised the European Central Bank for keeping interest rates on hold and said its focus on inflation was wrong at a time of economic stagnation. Keeping the euro undermined was also news of a bomb in Cologne, Germany.

A suspected nail bomb exploded in a predominantly Turkish district of the city, injuring 22 people and authorities have not ruled out it was a guerrilla attack.

The last trading day witnessed the dollar peak to a three-week high against the euro, after a Federal Reserve official stoked expectation that the central bank could be aggressive in raising U.S. interest rates. St Louis Fed President William Poole told Reuters in an interview that Fed must raise rates more quickly than the market expects if inflation speeds up.

He said delaying Fed action would not help the U.S. economy. The euro briefly dropped through the psychologically key $1.20 mark to three-week lows of $1.1964.

Meanwhile most of the economic data from the U.S. which were expected last week has been rearranged to accommodate Friday's state funeral for former President Ronald Reagan.

This week will witness U.S. inflation numbers top the agenda as the market tries to work out just how aggressive the Federal Reserve will be when it starts lifting interest rates.

The Consumer Price Index is out on Tuesday and will be followed later in the week by inflation data from Europe, while Thursday sees the focus turn to the Swiss Central Bank, which may join the global monetary tightening trend.

Range for the week: $1.1850 - $1.2150.

Japanese Yen

The yen staged a powerful rally against the greenback at the onset of the week, fired by signs of renewed strength in the Japanese economy.

Preliminary first quarter data showed Japan's economy grew 1.4 percent, or an annualised 5.6 percent. Painting a flowery picture again for the Japanese economy was comments from Bank of Japan Deputy Governor Toshiro Muto who said the outlook for the Japanese economy was reasonably good for the foreseeable future.

He restated the BoJ's commitment to easy monetary policy until deflation ends and said he saw prospects for continued economic recovery. The yen however lost steam the following day as the Japanese share prices failed to extend gains, disappointing yen bulls.

With huge uncertainty looming over the pace of future credit tightening by the U.S., market players were hesitant to take aggressive actions.

The dollar surged to a high of 110.45 against the yen on the last trading day as the market took comments from Fed official Poole to suggest Fed tightening could be more aggressive than it had been anticipating. In the coming week, the yen is likely to trade on a cautious note, with focus on the release of inflation numbers from the U.S.

Range for the week: 109.00 - 112.00

Sterling

Sterling fell more than one percent against the dollar as the greenback surged higher across the board.

The pound dropped to a two-week low against the dollar after comments from St. Louis Fed President William Poole that the Fed must raise faster than present expectations if inflation accelerates.

In addition for the pound, after Thursday's quarter point interest rate hike by the Bank of England, sterling positive news had been priced in, leaving it with no fresh impetus to move higher.

Meanwhile, news that Prime Minister Tony Blair's Labour Party was projected to have come third in local elections appeared to have had little impact on the pound.

Blair's public ratings have plunged over the past year and although media speculation about his future as Labour leader heats up periodically, political analysts still think he will lead his party into general elections expected in 2005.

Sterling markets face a big week in terms of data and events next week, with British finance Minister Gordon Brown and Bank of England Governor Mervyn King set to address the annual Mansion House dinner for City bankers on Wednesday.

The market will be watching for any hints from King about the pace of Bank of England rate hikes. May consumer price data will be released on Tuesday, unemployment on Wednesday and retail sales on Thursday.

Range for the week: $1.8000 - $1.8300